CFD Trading For Beginners
With high leverage options and a range of financial markets, there is a lot to think about as a beginner in CFD trading. Fortunately, if you’re looking for a CFD trading guide for dummies, you have come to the right place. This tutorial will cover the basics of CFD trading for beginners, including important strategies and how to find the best platform.
- A CFD (Contract For Difference) is a contract between you and a broker, based on the difference in price over time of an asset (a stock, currency, commodity etc).
- When you buy a CFD, you choose if you think the price will go up (a long contract) or down (a short contract) from where it is right now.
- If the price then does change in your chosen direction, the broker will pay you the difference in price when you close the contract. If the price changes in the wrong direction, you will have to pay the difference to the broker.
- CFDs can be traded with leverage (also called margin), meaning that you can borrow funds from the broker to trade with. It can supercharge profits, but also losses.
Best CFD Brokers For Beginners
CFD Trading Explained
CFD stands for Contract For Difference and the name is very literal: it means a contract between two parties to pay the difference in an asset’s price between the opening and closing times of a position. The key thing about CFD trading is that an investor never actually owns the underlying asset, they merely speculate on where they think the price will move. This is particularly beneficial for beginners, as you can speculate on the price of crude oil if you think it will go up without having it delivered to your door, for example.
Margin CFD Trading For Beginners
CFD trading for beginners is popular because of access to leverage. With margin trading, you invest a fraction of the total cost of an asset and a broker lends you the rest. This means you can take a large position while only paying for part of it upfront. The percentage you must pay is set by the broker, and it depends on the asset you are trading with – it often ranges from 5% to 20% of the full price.
A good way to conceptualise leveraged CFD trading for beginners is through an example. Imagine the cost of a share in Apple is $100, and your broker offers CFDs for stocks at a 10% margin. This means you will be able to buy a CFD for one share for $10, and your broker will lend you the remaining $90.
If the share price rises to $110 and you close your position, you will return the amount borrowed to the broker ($90), get your investment back ($10) and make an extra $10 (minus any fees) – doubling your initial investment.
However, the downside is that you will always need to return what you borrowed to the broker, even if you lose money. If you close your CFD when the share price has dropped to $80, you will need to pay back $90 to the broker – so you will need to pay an extra $10 on top of your initial investment.
CFD trading can be as risky as it is rewarding, so if you are a beginner trader, never invest more than you are willing to lose, carry out thorough research and formulate an approach to risk management.
How To Start CFD Trading
The first step to CFD trading for beginners is to find a broker. If you just go with one of the brokers recommended above you will be fine. Start trading by using a CFD demo account, which will be loaded with virtual funds and have access to the same markets and features as the live accounts.
A demo account means you can practice trading strategies with real market data without risking any capital. They are also a great way to test out the platform and see if it is right for you.
Here are a few other things to look out for in a CFD broker:
Choosing a Trading Platform
When you first start trading CFDs we recommend just sticking with the trading platform offered by that broker. You don’t need overly fancy tools or charts just yet, focus on understanding how buying and selling CFDs works and how it affects your funds.
Start very small and make sure you understand exactly what’s happening at each step of the process of buying and selling contracts, and what going long or short means for your results.
As you get more comfortable you could (but don’t have to!) consider using an independent 3rd party platform, like the very popular MetaTrader 4 trading platform. You will want a software that is user friendly and reliable.
Depending on your strategy and frequency of trading, you might prefer MetaTrader 4 or MetaTrader 5. These are both popular in the day trading industry and supply a comprehensive range of features and tools.
Or, if you intend on a more casual style of trading, a mobile app might be the answer for you.
Most reputable firms offer proprietary software that can be downloaded for free onto your iPhone or Android device. These can offer a simpler way to trade.
Generally, opening an account that supports CFD trading for beginners is free. CFD brokerages make money through spreads, commissions, margin losses and small fees for holding your positions overnight, called swaps. Some brokerage companies will also charge you when you deposit and withdraw funds. Keep in mind that there may be a minimum deposit or minimum trade size. It is important to look carefully at the fees offered by each broker and choose the one best suited to your trading needs.
There are some deceitful brokerages out there and finding a regulated provider will help you avoid potential complications. The safest way to get started CFD trading for beginners is by finding a broker that is regulated in your own country.
For example, the best brokerages for CFD trading as a US (United States) resident will be approved by the Securities and Exchange Commission (SEC). Otherwise, look for ones that are regulated by renowned regulatory bodies, like the FCA (Financial Conduct Authority) in the UK or the CySEC (Cyprus Securities and Exchange Commission) in Europe. These bodies will offer various levels of protection and compensation, including negative balance protection so you can’t lose more than your initial deposit.
In case there is a fault and your capital is at additional risk, you will want a responsive customer support team that is on-hand at all times. Many will offer a 24/5 live chat service, which you can check on their website for responsiveness. Alternatively, e-mail, telephone and social media channels are popular support avenues.
CFD Trading Strategies
There are two main types of orders used when CFD trading for beginners: The Long Buy and The Short Sell.
The Long Buy
If you believe the price of an asset, let’s say gold, will go up, you will want to “buy” or open a long position. When trading CFDs, it is important to remember you are never actually “buying” the asset. Instead, you are buying a contract to speculate on the price of that asset.
If the price of gold per ounce is $1,500 and your research suggests that it will rise, your broker may offer a margin of 5% and you could buy a CFD for 100 ounces. If you bought the asset in full, the trade would cost you $150,000 – but because you are buying a CFD for it, you only need to pay 5% of the total, or $7,500.
You can calculate your profit or loss by working out the difference in unit price between the current price and the opening price, and multiplying it by the number of units (in this case, 100 ounces). For example, if the price of gold rises by $100 to $1,600 you will have made $100 X 100 ounces ($10,000). If the price decreases by $50 to $1,450, you will have lost $50 X 100 ounces ($5,000).
Note, a CFD broker will also typically take a small fee, usually in the form of a spread and/or commission.
The Short Sell
Short selling is often passed off as the more complex of the two order types, but it is simply the opposite of the long buy. In essence, you are borrowing an asset from a broker to sell it off and then buy it back and return it at a lower price later down the line. When you close your position, you return the asset to the broker and keep the difference in cost. The best moment to do this is when you are confident the price of an asset will decrease.
Let’s imagine the price of gold is at an all-time high of $2,100 an ounce and you are convinced it is going to crash soon. You could open a short position using a CFD for 100 ounces of gold at $2,100 per ounce with a margin of 5%.
This will cost you $10,500 (the total cost of the gold would be $210,000, 5% of that is $10,500).
If your prediction is correct, and the price of gold drops to $1,900, you can calculate your final profit by multiplying the difference in unit price between the opening price and the current price, multiplying that by the position size. In this case, your profit will be $200 multiplied by 100 units – a total profit of $20,000.
Note, a CFD broker will also typically take a small fee, usually in the form of a spread and/or commission.
This guide cover the basics of CFD trading for beginners, but if you’re serious about it, there are also other ways to supplement your learning. The main tools you can use to learn more about CFD trading for beginners include:
- Trading courses: There are plenty of websites that will explain the fundamentals of CFD trading. Some trading schools and academies offer sophisticated online trading courses that will teach you how to trade CFDs, offer customised advice and let you ask questions of experts. There is a wide range of teaching styles, fees and platforms, so make sure to compare courses to find the most appropriate one for you.
- Brokerage tools: Most also offer trading education so you can learn about CFDs from scratch while using their platform. These broker courses can even be integrated with a demo account so you can practice and tune new strategies with real market data. Using platform-specific resources can also help you learn more about the tools your broker offers and how to make the most of them. These features can include candlestick charts to track trends, profit calculators or automated trading bots.
- Online forums: Chatting with other traders is a fantastic way to learn about investment opportunities and new strategies. You can find ‘CFD trading for beginners’ forums online and on social media. There are also extensive CFD tutorials available for free on YouTube.
CFD Trading Tips For Beginners
Before you start trading, you need to find a suitable strategy and style. Below are a few popular techniques when looking at CFD trading for beginners.
Scalping is a strategy used by day traders. The idea is that you make a high volume of small, profitable trades in a single day, the profits then add up and you have distributed your risk. Scalping can prove a clever if not intense way for beginners to make daily profits. However, this technique requires a lot of time and dedication to carry out manually, though some brands do offer programmable bots and algorithms that will execute positions at pre-determined points.
Long Term Trading
CFDs have no expiration date, so positions can be held for extended periods. Remember that you may incur charges like interest and overnight holding fees, so if you are thinking of long-term CFD trading as a beginner, make sure you calculate your expected costs at the start.
When you buy CFDs with leverage you only need to pay a percentage of the full price of an asset, called the margin, and your broker will lend you the rest. You can also trade other instruments with leverage but CFDs offer particularly low margins.
CFD trading for beginners can often seem more confusing when leverage and margin get thrown in, but they essentially both refer to opening a position greater than you have the capital to do yourself. Margin is often written as a percentage (5%) and leverage as a ratio (1:20). For example: imagine a share in Tesla costs $200. If your broker offers a CFD with a 5% margin, you will need to pay $10 per share. If your broker offers a CFD with 1:20 leverage, you will need to pay one-twentieth of the full price: 200 divided 20 is also $10.
Margin (or leverage) is a double-edged sword, as it magnifies both your profits and losses, a concept often missed in CFD trading for beginners and dummies tutorials that market investment services. As a result, less experienced traders sometimes make the mistake of overtrading.
Final Word On CFD Trading For Beginners
CFD trading for beginners can be rewarding with an extensive list of leading brokerage firms offering contracts for difference on popular financial markets. However, there are still significant risks, so research and practice should be carried out to mitigate losses. Fortunately, with a wealth of useful ‘CFD trading for beginners’ PDFs, books and educational material available, anyone can learn the fundamentals and get started.
What Is CFD Trading For Beginners?
CFD stands for Contract For Difference. It is an agreement between two parties to pay the difference in an asset’s price between the opening and closing of a position. CFDs are a derivative so traders never own the underlying asset, such as gold, for example.
A CFD is a great instrument to trade for beginners, if done responsibly – it’s simple and intuitive and easy to get started with. Beginner-friendly CFD brokers also offer a lot of educational resources to help new traders get started.
Is CFD Trading A Good Idea for Beginners?
CFD trading can be rewarding if taken seriously. Low margin rates and the fact that traders never own the underlying asset can make it attractive to new investors. With that said, CFD trading is risky because you can lose more than your initial deposit. As a beginner, consider trialing your strategies on a demo account before investing real cash.
Should I Start CFD Trading?
If you want to learn about the financial markets, you are good at keeping your cool and you can take a sensible approach to managing risk, CFD trading could be for you. There has never been more resources, online tutorials and helpful tools to aid CFD trading for beginners.
What Is The Best Platform For CFD Trading For Beginners?
CFD brokers that are good for beginners have proprietary platforms that are geared towards simple CFD trading, with intuitive and user-friendly interfaces. We recommend that beginners use these to gain experience with minimal distractions.
Where Can I Learn More About CFD Trading For Beginners?
There are a myriad of education sources aimed at CFD trading for beginners. In-depth courses, broker tutorials and online forums are widely available so you should be able to find something suited to your needs.